they can fix their balance sheets, officials are pushing through policies designed to restore their competitiveness.

The risk to Germany, whose exports account for almost half of gross domestic product, is that transforming the region's struggling nations into blueprints of itself may work too well. Efforts by euro-region governments to cut labor costs may help exporters across southern Europe challenge the dominance of German competitors, ranging from Siemens AG, Europe's largest engineering company, to carmaker Bayerische Motoren Werke AG.

"It's true, it's our fate that competition will increase and we'll have to hurry up to get better as well," Wolfgang Clement, a former government minister who oversaw former German Chancellor Gerhard Schroeder's economic policy revamp, said in an interview. "My big concern is that we become complacent amid all this talk of Germany being strong."

Germany, dubbed "the sick man of Europe" after its struggles to cope with the aftermath of reunification that began in 1990, has turned itself into Europe's growth engine and the world's third-biggest exporter after China and the U.S. in 2010 by squeezing wages and diversifying manufacturing.

Export Growth

German labor costs rose at half the pace of Greece's in the 10 years through 2010, according to the IMK economic institute in Dusseldorf. Export growth averaged 5.2 percent per year in the same period, compared with 3.1 percent for Italy.

With the euro region still Germany's largest export market, Merkel is pushing debt-strapped nations to follow her country's lead and push through measures to promote economic growth and reduce deficits.

"I would rather focus on growing competitiveness in Europe than constantly having to worry about rescue programs," Merkel said in March. "We're ensuring that Europe as a whole improves."

That same month, Merkel and French President Nicolas Sarkozy got most of the European Union to sign up to the so- called Euro-Plus Pact to boost competitiveness.

While efforts to stem Europe's debt crisis have focused on coordinating fiscal policies, leaders also have sought measures to foster growth. As market turmoil threatens economies and corporate earnings across the region, cash-strapped euro members are succumbing to such pressure in order to catch up with better-performing peers.

Revamp Call

Italy and Spain, Germany's biggest potential rivals, should revamp their economies to improve competitiveness that is below the region's average, the European Commission says. As both countries struggle to cope with bond yields close to euro-era records, Italy should make labor cheaper and Spain should improve productivity and reform its wage practices, according to the commission.

Increases in employment costs of all euro nations outpaced Germany's in the decade through 2010. German hourly labor costs rose an average 1.7 percent per year, while they jumped 2.9 percent in Portugal, 3.2 percent in Italy, 3.4 percent in Greece and 4.1 percent in Spain, the labor union-affiliated IMK institute said Dec. 12. The figures were based on calculations from Eurostat, the EU statistics agency.

"Based on the wage restraint we've seen over the past years in Germany, we still have a certain head start," said Thilo Heidrich, a Bonn-based economist at Deutsche Postbank AG. "Over the medium term though, competition should increase."

Pledged Measures